Line of Credit

Somebody very dear to me messaged me today and told me that he’s stressed, because he has a problem. He needs a couple of hundred thousands of dollars to finance a deal that he’s working on. It should be easy for him, knowing he’s very rich, but sadly, his money is tied up in other investments. So I got to thinking- a problem like that will not happen if you have a good relationship with the banks.

In the Philippines, I used to work in the bank and I was able to take part in commercial loan transactions. And I remember, when I was still a financial analyst, I help set up a credit facility which is called a Line of Credit, and specifically at that time, it was the omnibus facility.

I browsed the internet, and I believe it is something that is called the working capital loan in the states. For people who are familiar with accounting terms, then the name itself says a lot. Basically, a working capital is the fund you use to buy inventory, pay employees, and basically pay and purchase things that are related in the everyday operations of your business.

So here is how it works. Say for example, you have a business, and you have a relationship with the bank. Normally the bank would require you to submit 3 year financial statements, and other financial and company documents that the bank deems necessary. This is standard procedure so that the banks can roughly gauge the risk that they’re taking, and compute for the right interest rate and terms.

Once the line is set up, you can then withdraw money as the need arises. Say for example the bank gave you ten million dollar working capital LOC. You can withdraw up until you reach a total of 10M. Good thing about this facility is, you are only charged with interest from the money that you actually withdrew from the credit line. And personally, having an LOC gives you enough space for unforeseen events. Which will eventually happen one way or the other because you can’t possibly predict everything in business.

So, I hope my dearest learned his lesson this time. Because he admitted that he really didn’t put any effort to have a relationship with the bank, nor make any provisions for eventualities such as what he’s facing now.

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